Knorr-Bremse AG

Good afternoon, ladies and gentlemen, and welcome to the Knoll-Brenzer AP Quarter 1, 2015. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Today's representatives are CEO Mark Listerseyer and CFO Frank Weber. Let me now hand the floor over to the Head of Investor Relations, Andreas Spitzhauer.

Thank you, Operator. Good afternoon, as well as good morning, ladies and gentlemen. My name is Andreas Wittsbaum, Head of Investor Relations of Knorr Bremse AG. I want to welcome you to Knorr Bremse's conference call for the first quarter results of 2023. Today, Mark Lister-Zeyer, our CEO, and Frank Weber, our CFO, will present the results of Knorr Bremse, followed by a Q&A session. The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investor Relations section. Here you can find today's presentation and later transcript of the call. It is now my pleasure to hand over to Marcus to say a few words.

Thanks, Andreas, and welcome everybody to our quarter one 2023 earnings call. We appreciate you joining us today as we have to tell you something. Let's kick in off with today's key takeaways on chart number two. An ongoing tough economic environment, especially due to the inflationary headwinds, Florida 1 developed as expected. Revenues increased significantly, while EBIT margin was under pressure. We told you during our financial year results that from a financial point of view, 2023 will be the margin. We are fully on track with our full year 2023 guidance, which we confirmed yesterday. All in all, the Marlin rail and truck is holding up nicely, which underlines the robustness of our business and the activity of our embargoes. One of our current strategic priorities is to optimize the strength of our portfolio. We have already made good progress in recent weeks and months. We signed the sale of a foundry from our steering operations in the US, and the keeper sale is doing good progress as well. I will provide you more details on portfolio optimization and cost reduction opportunities during this strategy update on July 18th this year. In addition, at this virtual event, I will share our ideas for the future direction of small businesses. Let's move to chart number three. Especially in Europe and North America, underlying demand in the rail market remains strong, driven by governmental support and the remittance pushed towards green mobility, where the most eco-friendly mass mobility solutions are, and of the future, especially of the future. The elevated order books of our OEM customers in the translation into RBS backlogs are a clear proof of this. The market in China seems to be slowly but steadily recovering from two very weak years that were driven by economic challenges and the zero-COVID policy. The end of this policy is positive for all of us, and the increased ridership is already showing a positive effect on our aftermarket business. After the year OA, strides will take some time to improve again. At the moment, the biggest concern in the rail segment still is behind inflation. As highlighted before, splicing in long-lasting OE contracts can hardly be adjusted. Aftermarket is easier, but we also have our important long-lasting relationships with the operators in mind. We do not want to risk them simply because of some positive short-term financial benefits. The truck market also faces ongoing good demand in Europe and North America. Truck production rates significantly increased in both regions in the past quarter and are also expected to be at least stable or grow slightly on a full-year level. Overall, in terms of demand, we expect The first half year is to be stronger than the second half year this year. Stock production rates in China in quarter one recovered significantly as expected. We have benefited from this recovery due to our leading market position and leading position in field of technology, as well as our successful restructuring activity. In addition, there are good opportunities regarding contemporary ego. driven by the rather lower safety standards and the move towards innovative and reliable technologies also in China. Inflationary headwinds are also an ongoing challenge for the truck industry. We're confident to finalize the ongoing pricing discussion, so-called Wave 2, with good results. It should enable us to achieve a positive price-cost ratio this year for trucks. I would like now to hand over to Frank for the financial insights.

Thanks, Mark, and welcome from my side as well. Thanks for being with us today. Let's have a quick look at the financial overview for the one and top four. Revenues on group level amounted to 1.9 billion euros, an increase of 14% year over year, driven by both divisions, which both posted double-digit growth. EBIT in absolute terms amounted to 192 million euros on group level, an increase of almost 6% versus prior year, driven by CVS. This corresponds to an operating EBIT margin of 10% in the first quarter, 90 basis points lower versus prior year, driven by RVS, while CVS improved. Orders increased slightly by 3% to 2.2 billion euros in the past quarter compared to an already very strong previous year quarter. This down development was driven by another strong performance in the truck division. The very positive highlight of the quarter clearly was the strong order book, which once more reached a record level of 7.1 billion euros. It provides good visibility and confidence for the months and quarters ahead. Let's move to chart five. CapEx in quarter one amounted to 64 million euros, representing 3.4% of sales. It is stable in absolute terms year over year, but lower in relation to the revenues and well below our target range of 5% to 6% mid-chart. Networking capital increased by 270 million euros versus quarter one of 22. I will go into more detail on that on the next slide. Rosy for Q1 amounted to 16.3% as of March 31st, which is slightly lower compared to last year's level, given impacts from both profitability as well as working capital increase. On sharp ticks, I'd like to provide more details regarding our free cash flow. It was negative as expected and came in at minus 199 million euros in the past quarter. but also an expected some 32 million euros better than in the previous year. Additionally, our free cash flow is weakest in the first quarter and this year is no exception. The biggest impact on the development of our free cash flow still is the higher net working capital. One driver for this is that increased interest rates led to a deferred payment behavior and further increased accounts receivables among some larger customers. At the same time, Specially agent payment patterns burden us, meaning building up accounts receivables starting already from January and carrying out payments very back-end loaded throughout the year. In addition, we maintain a high level of inventories in order to be able to act flexible in response to customer requests and to ensure a high degree of supply security. Our customer-first strategy is a cornerstone of our long-standing and successful customer relationship and lies the foundation for our continuously good order intake as well as the basis for price increase. Free cash flow in the coming quarters should improve driven by increasing profits and the reduction of networking capital in relation to the underlying business development. We strongly monitor free cash flow as our important key performance indicator, which represents 20% of our short-term incentives. And we are convinced to improve quarterly free cash flow significantly and to reach between 350 and 550 million euros within the full year 23. Let's take a closer look at the divisional performance in quarter one, starting with RVS on chart seven. Order intake of RVS was again strong with 1 billion euros, despite hard comps year over year. Book to build in quarter one reached 1.17. We are pleased with the high order backlogs of our OEM customers, which will be translated into orders on our books in upcoming quarters with, given the usual project timelines at OEMs, a time lag of roughly 9 to 18 months. benefited from increased ridership in the aftermarket business, the acquisition of DSB in Denmark, and from strong metro business. APEC order intake developed slightly better, especially driven by China. The main positive driver in North America was aftermarket based on a strong overhaul demand. The order book also increased by more than 20% year-over-year to more than 5 billion euros. This is an extremely solid foundation for the business development in 2023 and beyond. Let's move to chart 8. Revenues in quarter 1 amounted to 855 million euros, an increase by more than 10% year-over-year, driven by aftermarket business, which compensated a slightly weaker OECD. mainly driven by timing of project executions in Europe. All core regions developed generally positive. Europe, our most important market, driven by significantly higher aftermarket business. North America also recorded growing revenues in OE and aftermarket business. From a segment point of view, both freight and passenger cars were up. Finally, we saw a certain recovery of revenues in China as well as an overall solid development in APEC. which made up for the weaker business in India. The operating EBIT margin of RBS in quarter one was 13.1 after 15.7 a year ago. On the next chart, I will provide some more details regarding this development. In the past, quarter three major reasons led to the strong drop of profitability. First of all, missing a creative Russian business, which was strong in quarter 1, 2022, but has been stopped on purpose since the second quarter of 2022. Starting from the second quarter, 2023, this year-over-year effect will be gone. But for this quarter, it finally led to 160 base points of profitability drag. Secondly, ongoing inflationary headwinds. That cannot be compensated as quick as in truck, for example. As mentioned before several times, the characteristics in rail are different, and we will suffer from a negative price-cost ratio in full year 2023. Higher input costs can only be partly offset by higher prices in the aftermarket. Please keep in mind that 30% of our 23 RBS revenues stem from order books we received before the inflation started to strongly increase last year. Thirdly, in the past quarter, there was also a weaker mix in India, resulting from lower revenues in the very profitable segment of passenger coaches. These three negative effects were only partially offset by improved volumes and our PCPP program measures. As a result, in the quarters to come, we should see better margins supported by higher revenues and the operating leverage as well as by our PCPP measures. In addition, the planned sale of keepers should contribute to this development. Nevertheless, inflationary cost pressure will continue throughout 2023. And as mentioned, for the full year 2023, we expect RBS margins to be lower than previous years, especially given the delay in pricing. Let's continue with truck on slide 10. Incoming orders of CVS amounted to 1.18 billion euros, which is an increase of 14% year-over-year, well supported by the strong underlying demand in Europe and North America. We are pleased to see that China is significantly recovering as expected. Please keep in mind that the extremely high order intakes in recent quarters are extraordinary and should not remain on such high levels throughout the year. we expect that the truck demand in the first half of the year will be stronger compared to the second half. The book-to-bill ratio in quarter one was at a very strong 1.12. The order book of our truck division amounted to almost 2.1 billion euros at the end of March 23, which is again remarkably 14% higher year over year. Let's move on to slide 11. CVS posted over €1 billion in revenues in Q1, which is a significant increase of almost 18% year-over-year. Again, a very strong result. CVS saw positive development in both channels, OEs as well as aftermarkets, including an increased development in all regions. Transport volumes and infrastructure activity have continued to be solid in most markets. In combination with the customers' need to renew aging fleets, This contributes to the good demand for our product. Despite the strong OE growth, the aftermarket share remains stable at 28%. CVS should also be able to further post-solid revenue growth in 2023. This positive outlook is founded on the strong underlying truck market, especially in China and the elevated order book. In quarter one, CVS achieved an EBIT of 95 million euros, which is a significant improvement year over year of almost 25%. The EBIT margin amounted to 9% compared to 8.5% a year ago. This improvement is fueled by the first wave of price increases, which were concluded in 2022. In addition, cost measures and the acquisition of Cordiali contributed positively. Profitability of CVS in the full year 2023 should continue to improve as we expect each quarter in 2023 to be slightly above the prior year figure. Overall, CVS should be able to offset RVS margins decline this year. I want to finish with a guidance for 2023 on chart wealth. Our main assumptions are outlined on the right side of this page. We also expect that all net extra costs due to inflation this year will be once again compensated with our PCPP measure. For 2023, we continue to expect revenues between 7.3 to 7.7 billion euros and operating EBIT between 10.5 and 12% and the free cash flow between 350 and 550 million euros. Despite rather weak operating margin levels in quarter one, we are fully on track with our full year guidance. The worst should be behind us and group margin levels in course of this year should eventually improve. With this, I hand over back to you, Moritz.

Thank you, Frank. Let's go to page number 13. Many different economic and geopolitical topics continue to weigh on our business activities. and small profitable level. If we ensure that the excesses both in line can be used as money permitted to start these investments, for the full year 2023 we expect another €300 million of net extra costs in our books on top of the prior year's €325 million. Just as last year, we expect to fully offset this extra cost with price increases and cost measures. which will show that positive impact with some delays though. We have already successfully implemented efficient restructuring measures in North America and in China to reduce fixed costs. Restructuring of our steering business is also ongoing. It's the first step of the sale of the foundry at Sheppard. It will continue in the next month to come. Please be sure that there is more to come. We'll share more on these concrete topics at our strategy day update in July 18. On chart 14, I would like to keep you updated on our and my agenda. Onboarding, thanks to the whole executive team, was very smooth. All while I'm really impressed by KB's people and their engagement and dedication and confidence every day. The executive board gets along very well and and enjoy maneuvering SnowBrenza through these extraordinary times together as a strong team with fruitful discussions based on an open mindset. We have started to work on a common target picture for SnowBrenza in order to create a long-term vision and a return to profitable growth. Portfolio review, improvement of our fixed cost base, and the rollout of further efficiency measures remain our core operational focus in the months ahead. We call this the brownfields, or I call it housekeeping. Together with my colleagues, I'm currently conducting a strategy piece by looking at both the current setup, but also identifying new potential brokers for both divisions as well as potentially accretive add-ons that could fit our business structure in DNA. This represents our greenfield. There are many opportunities and believe me when I say that we will turn around every stone to find out how to improve, sharpen and accelerate our business. First results will be presented in our virtual strategy update on July 18. And if this works, I would like to thank you very much for your attention and let's start now with the Q&A.

Ladies and gentlemen, we will now begin the Q&A session. If you would like to ask a question, please press 9 and star on your telephone keypad. If you would like to withdraw your question, press 9 and star a second time. And the first question comes from Steffen Weyer, UBS. Please go ahead with your question.

Yes, good afternoon. It's Sven from UBS. Thanks for taking my questions. The first one is just to follow up real quick to help us frame our expectations for the 18th of July. Should we also expect you to talk about mid-term margin targets at this event, or is it going to be mostly focused on brownfield actions for the brownfield? Just wondering how comprehensive the agenda will be for the day. Thank you.

Thank you, I will take it.

What you can expect is a clear view in terms of products where we want to go. We will give you not absolutely in perfection which kind of portfolio we will have, which our target portfolio will look like, because otherwise we spoil the targets which we will eventually acquire. But the adjustment of the portfolio will be one of the major, major informations and major infos what you will see on this day. What we will also say is that we have an organizational, I would say, overmatch here. We are over-organized. Currently, we started with 146 legal entities. And you know, by your own organization, the more legal entities you have, the more SG&A costs occur. And the more complexity you have, the less focused we are. So that means currently we have deducted it already to 126 organizations, and we will go further, and there is a clear target which has to be achieved. So this kind of message is relatively clear, will be given. What will be not given is which kind of target assets we have in mind.

But for SureSpend, we will also add the financial direction which we target going into the future as well.

Thanks for this. My second question is just on talking cash flow. And you mentioned again some payment delays in India and China. Could you just kindly update us on the situation with the Indian customer where I think there was some tech issues on the freight side, where you stand on that, and if that's behind the delay in India. And also, more broadly speaking, you think that you also have to identify further self-help measures on the cash flow side that you could update us on in July, or do you feel you are on track with the measures you have already taken?

Thank you. Thanks, Ben. I assume you're referring also to the So the news report that you've seen, which is one incident, of course, these kinds of incidents happen in the rail industry globally, so to say, not only in India and with elements of trains where we also supply products to what happens or is normal course of business, so to say. In this case, We are in discussion with the Indian colleagues. We talk about, so to say, the way how to fix the issues that Indian Rail has with their wagons. Please be informed that we are not the system providers, the complete system providers, so we're just delivering some components there, so we are part of these discussions. guy on the table that is somehow being blamed. This is not the case. We're in good discussions, but it led to the situation that they have also been withholding some payments in regards to AR. They have now released the payments again, starting with May. So this is a good sign. We're in good talks with them and this should definitely contribute then positively for the cash flow development throughout the remaining months of 2023. This to this element of your question, the more general, I mean, yes, we have several levers at hand that we are pursuing. We, of course, strive for for inventory reductions, which is one big element in the respective assembly plan that we are having. We have a detailed plan of what needs to be achieved in each and every month in order to take now the situation where revenues should be increasing going into the new year or in the months to come. We should take this tailwind of being able to bring them the scope of days down for inventories, which is a measure that is with the operational experts and procurement in combination underway. Secondly, there is, of course, game management improvements that we are driving within the company in order to bring accounts receivables. back to the levels where we want them to have and to bring more discipline, so to say, to the customer's payment behavior. Of course, this is not always a lever that you alone have in your hands. You also need to have the customer understand it and be willing to pay in the end. And so I would say those are the big levers that we would have. And of course, we will give you in July also an update on that, where we stand and what we perceive as our path forward in regards to working capital management and ROCI.

Thank you. And I don't know, were we limited to two questions or can I pencil in another one?

Maybe later.

Okay, that's fine. We'll do. Thanks.

Then we come to the next question here. The next question is from Akash Gupta, JP Morgan. Please go ahead with your question.

Yes, hi, good morning, everybody, and thanks for your time. My first question is also on the event on 18th of July. I will keep the details for the day, but I'm just wondering, Mark, if you can walk us through the framework that you are using for portfolio reviews in terms of what are the KPIs that you are assessing each of the business unit and what should we think about like the level of or amount of assets that could potentially be reviewed which needs to be turned around either way or maybe set for disposal. That's question number one and the second one is on Your policy of writing down receivables, I see you have some receivables which are overdue for quite some time. Can you walk us through what is your policy on writing down receivables, and also can you tell us how much of the quantity of these receivables which are deferred since quite some time? Thank you.

So, thanks for the question, Akash. I will do the following, otherwise the 18th will be obsolete if I am now coming too much into details. I understand your curiosity on it. I would love to give you now already some of my deep thoughts on this, but I am warned here not to do that, otherwise nobody will show up when it comes to the 18th. I give you only one response to the portfolio. We have currently roughly 1.4 billion of revenues where we have a deep dive, yeah, in terms of revenues of last year, where we have a very clear direction. Either it has to be fixed in a reasonable timeframe or we have to make a very clear decision. That's all to the technical portfolio. And this portfolio, by the way, derives also from the target picture of products, yeah, You have always to know where do you want to play, and then the question is what you play, how you play. The second question which you raised in terms of accounts receivables, there's one comment I would like to make, and then I will hand it over to Frank, because otherwise he's very mean if I get into his territory. You know that. He's very, very protective here. The thing is, and that has to be also something which we call now access expectation management. There is a change. And the change is, especially with China, China is very aware, especially in rail, what kind of position they have worldwide. They are combining roughly 40 to 55% of the global market annually. And this is one country. And they know that everybody wants to play in the field. And this is what they use. So their payment terms, their payments in terms of duration, when they pay it, This is something which we could observe not only with us, also with other companies everywhere in the area, where we see that they exceed by far the normal payment per event terms. And that is something where the question is also to you, how you could imagine to change that when the key customer of the world is just doing what he likes to do. And that is something which we have to live with. And with this very generic more philosophical point of view, I will hand over to the terms and the conditions of our accounts and see those as well.

Yeah, thanks, Mark. Of course, not everything is that I'm not getting mean. I appreciate if you take over parts of the question. The more serious elements, I mean, what Mark said is absolutely right. Akash, we've been talking about this since at least I'm with Knorr-Bremse, that the payment terms in Asia are much longer than the ones in Europe, given our revenues that we are making. in Asia this ends up to 300 million plus overall of accounts receivables that we would be having in our books with longer payment terms than the average that we see in the business so there's a general drag always kind of throughout the year and payments come in usually very late in the fourth quarter usually you know that pattern and you see it always in our free cash flow development the explicit one second element of your question I guess The explicit elements that have been somehow delayed more recently are slightly above 100 million euro in quarter four and which still represents a drag in the first quarter and where we're getting now partially releases. But be assured, Akash, we have not a single euro right at this point in time and not in the past had of general default, just as you know. Thank you.

Thank you. You're welcome, Akash.

The next question comes from William Aki, please go ahead with your question.

Thank you very much. Good afternoon to you both. China, can we just dig a little bit more into what your observations of recovery for RVS in the first quarter and perhaps some of the signals that you're receiving from your customers about expectations on build rates or fill rates for the aftermarket business? going into Q2, Q3, and building on how that will support RVS. And the same for trucks. I think we started with an assumption of about a market for 750,000 units in China as a base. Where do you see that evolving for this year?

Thanks. Thanks, William. Let me start with rail. First of all, Jürgen Wilder, our head of RVS, needless to say, is always very close to the customers. He was over in China just several weeks ago and we have been seeing photos of the production hubs of one or two major plants. plants of our core customers and they were completely empty. So basically underlining also a bit the hope of a very speedy recovery in regards to the OE market development throughout 2023. So this was really kind of interesting to see that really the plants are empty. OE business, we therefore expect only a slight increase in demand throughout the year with the quarters to come. It should start peaking in rather later in the year 2023, but only on a slightly improvement basis. In aftermarket, ridership levels are really good. The macro levels have reached in the first quarter already the ridership levels of 2019, so the pre-COVID levels. On the high speed and commuter side, it's slightly below the levels of 2019. But overall, this is a really good indication and should support us going through into the year. But after market not immediately coming in, so to say, ridership levels increased. First of all, ridership levels increased, then the number of trains on the tracks increased. Then the trains, those trains running reach a certain level of mileage and then they come for maintenance and overhaul and wear and tear of course starts. So in general, this should help us. As the year goes by and the months go by throughout this year, in aftermarket more than in OE, we expect for metro some 5,300 vehicles for the full year, which is a minor, minor increase compared to last year's level of roughly 5,200 metros. And in high speed, roughly 100 high speed trains compared to last year, it was around 90. So only a slight increase there as well. On the truck side, we do see the market for the heavy duties only. This is the figure that you are referring to of above 700,000, but we are still a bit cautious. It's been a good quarter one with 17% TPR up for trucks. but we see some 700,000 plus potentially not that bullish like some other players in the market rather take then the tailwind once it really comes along but we are seeing that a good TPR development in the first quarter and we're hoping also for a good second half of the year then in China but across the bridge once we reach it, I would say towards June, we see clearer, I think.

Thank you. Thank you. Then my second question, and then I'll have a follow-up, relates to the inflation slide, which you highlighted on page 13. You call out 300 million of incremental cost against the 350 last year. But when we look at the world, a number of those inflationary factors are now reversing So can you help us perhaps a little bit with your working assumptions around how the 300 headwind breaks down and how perhaps it's changed from last year through the supply chain or other factors on your raw material energy or component costs?

Yeah, thank you. Good question. And indeed, in order to be precise, the last year's figure was, I think, 325 million. And this year, on top, on top, come another roughly 300 million. And they are fundamentally completely different when it comes to the ingredients. Last year, we'll not talk again about last year, but this year is basically driven by energy. cost increases and personal cost increases. Those are the two major drivers in 23 in the wrong direction. In the positive direction, there is raw material this year, but to a large extent, of course, as I just said, offset by those other two elements. So you write raw material indices. If we look at the bigger ones coming down, cast iron, steel coming down, aluminum coming down, Coke coming down, plastics coming down. Of course, we have to watch that carefully, but what needs to be said in regards in order to prepare your production for the year 2023, you have to ensure a certain lead time, and that lead time also means you have to have your inventories, your raw materials, your half-finished goods, what have you, right in before you start, so to say, selling those on board, which means that you are still with a time lag behind in regards to the cost inflation. So we have still, so to say, in our working capital, good sitting and raw materials sitting with cost levels of the year 2022, needless to say. And this is one effect why we are not completely yet seeing a full, just a spot rate reduction that you would see if you look at indices. But overall, in general, you are right that the raw material should be at minimum a wash for us. It should be a tailwind. But the big chunk comes from energy. And with energy, you have to distinguish between our own so to say, energy costs that we are having, which is still in a double-digit million range only. The total energy costs of Knorr-Bremse Group are still below 100 million euros. And this inflation or the cost increase that we see here is some roughly 20 million euros year over year. But the big element of those 300 is, according to our estimates, the amount that our suppliers, tier 2, tier 3, tier 4, knock on our door and ask for material cost increases. Because you would have in the supply chain, of course, kind of a lot of energy intense sub-suppliers in the system. And this is the big chunk of what we expect. And the next big chunk is personnel costs. And to round it up with roughly two numbers, I would say roughly 150 million to 200 million out of that, which stem from the supply chain as kind of energy cost increases and also personal cost increases on the supplier side. And the remaining, I would say, 70 million is the big chunk of personnel costs on our premises around the globe. And there are some other minor cost increases then. But those are the two biggest elements. Long answer. I hope this gives you some more insight on this figure for you.

Great detail. Very useful for us all. Thank you. The last one is perhaps quick. I note that in your statement today, you highlight that there's now an establishment of the Thielen Family Foundation after long waiting. But there's also a clause at the end that you received a claim from a bequest concerning 59% of the equity. I think, first of all, just to clarify maybe the translation in the text, in the English text, what that means. But more importantly, can you share with us you know, your understanding of the foundation's intent longer term with its portfolio and particularly with the Knorr-Brenzer share.

So I assume that goes to me.

So in regards to the foundation, I think last time when we met, the question was, what is your governance? What's your structure? Now we're settling the structure. We have now all the positions are placed. I think you heard this morning that although the supervisory board of the Schiffton is now settled, we could gain excellent candidates from CFO from BASF. He's taking care of that. We have also now the chair of the executive board of the Schiffton, Mr. Storm. So now we are settling the whole thing. Not only that the foundation has found it. I think this was first week of April. Now we have also the people who are running it. This is number one. That's good. Good news for us. Number two. The first exchange we had with Mr. Storm and also with the other colleagues of his is very clear. They're very interested in keeping their position as it is. There was no indication at all that they have any form of change in the strategy or the shareholding. Number three, they represent 59% of the shareholdership of Norbrenze. So that means 59% of the 162 million shares are represented and hold by these guys or by this foundation. So everything else, what is now their plan, is there any change to come? We are not sitting there, so for us it's of course an important shareholder, but we are not involved in their thinking and thought processes, but we have not at all any indication, not any indication, that they want to change anything for the time being. More we can't tell you.

Super. Thanks for the clarity. Thank you. Let's come to the next question, please.

Yes, the next question comes from Debray, Deutsche Bank. Please go ahead with your question.

Oh, thanks very much. Good morning or good afternoon. Can you talk a bit about the portfolio review and the €1.4 billion of revenue that's is the subject of a deeper dive at the moment. Is there any way you could help us understand two things? First, perhaps the average profitability of this €1.4 billion of revenue, and second, the magnitude of the potential restructuring spend and impairments that could come out of the process.

But that would be question number one. Okay, again, like I said to Akash, I should be fair.

If I tell it to you, then Akash will never talk to me again. So I should be careful now. Now, the question is good. The thing is, the criteria to get into this 1.4 bucket is a non-performance in terms of average for the last five years. That's the criteria number one. The second criteria for getting into this 1.4 is that nobody could really, really prove that their cross-selling is really happening. You know? Because that's an explanation that could be an excuse for your non-performance in terms of EBITDA. That you're saying, yeah, because we are a contributor in a different way. By selling us, or by By getting our product to the customer, we can do other business which is very profitable. If this is the case, we call it profitable production. If this is the case, you have an excuse, we evaluate the excuse. But it will not last forever. And number three is, if the non-performing, whatever it is, unit, product, product group, Is there a plan by the management to recover to every level which we aim for? And you can imagine, everything what is not double-digit has a very difficult life today. And that means, if you don't come up with an internal business plan and convince us, we will not come up and convince you. So it's very simple. We will be the first cascade to make sure that this kind of business plan, which are now prepared, We want to see it, and we want to see it. You're even more rushing than us because you clearly told us everything marked what is not coming in the next 24 to 36 months. We're not really interested. And, of course, we can understand some of them, they're coming with 60 months of duration and long-term supervision and review. Long story short, these are the criteria to come into this 1.4. The 1.4 is dynamic. If they come up with a very convincing business plan in the next week to come, it will go down eventually to 900 or 1. Or it will eventually light slightly up. And next question number four is, what would be if you would already do what you are aiming? What will it be then? What is the effect? In terms of revenue, the effect is clear. It's just a deduction. But the alternative is always for aid. Keep it in six bits, but six bits within two to three years. Don't tell me five, ten, fifty years. Forget it. Or exit it. Now you understand, if I want to exit it, if I tell it too straight and too clear to the market, nobody ever will buy it. So that means I can't, in the interest of you as a shareholder, give you the information as in the interest of an analyst. Because then the thing which we identify is unsellable. So we can give you slightly different directions, and we can tell you what kind of perspective we have, but we cannot give you a list of names, let's say ADCDE. The only thing is, what we can say so far, the effect is really interesting in terms of 200 to 300 basic points. Stator is variable. So that is very interesting, and you understand why I'm so keen to make this kind of portfolio discussion and investment. Because without changing anything, we can go in this direction, but we have to be very stringent, we have to be smart, and we have to be in time tax. You know, it is a sequence which has to be following a logic. So hopefully, I know it was vague and akashic, You can blame me later that I gave you not this information, but you understand exactly because your portfolio manages how you want to do it. You don't claim what you sell tomorrow.

Yeah, fair enough. Look, I have a second question related to RBS. What is the share of your backlog today that has escalation clauses? And is it becoming more of a norm now when... you know, in your bidding processes and in the pipeline, and how do you expect this share of the backlog with indexation clauses to evolve over time?

Yeah.

Do you want to take that? Yeah, I'll take it, Marc. We already had in the times before the high inflation kicked in last year already more than 50% of our contracts in rails with price indexation clauses or with price sliding clauses, so to say. As you know, alone 50% of our business in a nutshell is anyhow aftermarket driven. We also have elements in the OE business which are much more product driven. business oriented than the sheer project business that you would usually see with the big OEs in rail, which is the freight business. So a big chunk of the business also in rails already followed back in the days a similar logic like the product business. So we have a big amount which we extended. The colleagues over the last year were able to improve the number of contracts with price guiding clauses. They were even able to improve and include further elements into the price guiding clauses, make them stricter. And I think those were good results that have been achieved in regards to the quality of the underlying contracts and the systematic approach within contracts how to tackle inflation. I think they have done a good job on that. Nevertheless, the situation remains tough, especially when it comes to OE contracts to further improve them. Of course, all the intakes that are coming in are having now the actual costs in the price calculations, so the good news is, the really good news is that the newly coming in order intakes are really with a good profitability. That is the good thing, and as I said, I think also in my speech, please keep in mind that we have had last year an order book, or end of 2022, an order book of roughly 5 billion euros for rail, out of which roughly 1.8 billion do come from almost before the war, which leads to the situation that, again, said before, 30% of our revenues in 2023 are a bit burdened for those contribution margins. And this amount will significantly shrink going into the year 24 and then basically be wiped out. towards 25 only a minor element will remain than in 25 and that is also the reason why we believe in increasing margins in the rail business giving that effect alone.

And just out of curiosity this 30% of revenue is it rather linear or was it a much higher number in Q1 for example?

That should shrink roughly over time.

It should be a bigger hit in quarter one and then shrinking towards year end. And in 24, similar.

Thank you very much. You're welcome.

The next question comes from . Please go ahead with your question.

Hi, thank you very much for taking my question. I've just got a question on your pricing. So you mentioned the company is establishing a mechanism in terms of pricing for the rail division. I'm just wondering how is this process doing right now and also in terms of numbers should we expect say 3% or still we should expect below 3% for pricing for rail this year. And also a follow-up on that, will your sales going into your customer chasing for price increase, will that affect your payment terms or cash payment terms in terms of the profile of your business, please?

First of all, let me just to make it clear, Andrei, I think we didn't say we now introduce this systematic, so to say, link between inflation and prices for the first time in Wales. We are improving it. I said before, we already had price-sliding clauses before high inflation kicked in, and we're now improving it as, of course, the pressure rises. So, first of all, I think that's important to mention. The second point is... I mean, we have also said that we will again in 2023 overall be compensating the inflationary cost increases with 300 million. And we also aim to achieve a kind of balanced cost-price ratio throughout the group at least in 2023. So that means we should also find in a similar direction price measures. And therefore, similar like last year, two-thirds of those price measures will be implemented in the truck division and the third in rail. And if you take a third out of roughly, so to say, 300, you end up at 100 million. And there, in the end, you're not far away with the 3% that you grossly indicated. So I can confirm that this is the year-over-year figure that we are aiming for in the rail division to achieve. Can you please help me out on the last element of your question or the third element of your question, I think it was, Andre?

Yeah, it's actually Calvin here. Yeah, the second part of that question is when you go for price increase to your customers, will that affect their demand on the cash payment terms over the short term or mid-term?

No, we don't expect that. No. We have not given in over the last weeks and months on any kind of payment terms in a kind of negotiation of higher prices.

Got it, thank you. And also my second question is related to the working capital and then cash. So you have around minus 199 professionals for Q1 and then targeting 350 to 550. And also you mentioned Q4 has affected Q1. So if we think about Q2 in particular, the cadence, do you expect the deferred payment by your customers In Q1, do you expect to collect them in Q2 or that's more of a gradual collection throughout the year? And also, how will Q1 affect Q2 free cash flow, please?

First of all, to the general pattern topics that I mentioned before, the more Asian ones, this is rather, so to say, a more back-end loaded quarter four kind of payment behavior that we would expect, so it would not ultimately turn into cash already in the second quarter first. Second, to the more explicit element, we talked about the discussions in India. I expect at least a partial relief in the second quarter already. Whether to the full extent, I doubt a bit, but as negotiations are kind of always kind of longer lasting, so maybe ultimately done via the third quarter, this would be the expectation. In general, we expect free cash flow in the second quarter not to be significantly better than in the first quarter, but not positive. And then third quarter positive and fourth quarter very good, so to say. This is somehow the rough indication of how it should go throughout the year.

Got it. That's very clear. Thank you very much. Thank you.

The next question comes from . Please go ahead with your question.

Good morning. So my first question is also just continuing on Washington Capital. If we think more on a medium-term basis, historically you were doing 45 to 50 days. That's also the target that was set on the medium term. Do you see a change here in terms of what you can go back to given some of the changes you have in your kind of portfolio and your region of exposure? Yeah, that's the first one.

You were talking about your estimates on scope of space, right, Lucas?

No, that's kind of the target that was set in your prior medium-term presentation. We are. 55 to 60 days for the Washington episode. I understand.

Yeah, I mean, the guidance that we have been given there for the mid-term was obviously at times before, so to say, the China market drop, before the Russian war over Ukraine, and definitely before the high inflation, ultimately, within. We do think that in very general, we stick to that kind of scope of faith. targets going into the future, but with adjustments for, of course, inflation, because inflation keeps in an AR and in inventories as well as in payables. And we're currently, so to say, working on all those impacts, how they would, so to say, impact those targets mid-term. Secondly, we have to take out, so to say, our scope of base for Russia, as we don't plan with Russian business anymore. So those three adjustments, I think, basically need to be done. A fourth element is, of course, that we have to, I think, react over time quite flexibly. We, of course, see, as you also see with other companies, the OAM behavior in regards to what they expected. from the suppliers when and to which extent to deliver. There might be slight adjustments in the general business model between an OEM and the supplier when it comes to working capital and to have your product at hand and this we will adjust as well. So I can't give you the concrete figure as of now. We will do so by July what we target here but expect those three three and a half adjustments to the prior trigger that we have had. Don't necessarily all go into the same duration. There might be some pluses and some minuses, just to say that.

Okay, perfect. And my second one is on pricing in CVS. Do you think that could be more of an issue in a tougher volume environment in H2 to kind of ask for further price increases and also just in your guidance for the positive price versus cost by the full year, is this mostly driven by kind of carryover of pricing or do you need to have further price increases and further negotiation in CES?

In fact, it's two questions, not one.

The one question is in regard is how is our pricing position when when the volume increase in the CDS market will no longer last. It's very clear we have here currently a price-cost ratio which is more and more getting favorable, that's for sure. Number one, that's for this year. When we, assuming that the market will go down globally, then of course we could see we could see two effects. The one effect is that the positioning what we have given us is now based and integrated in the contract, which is absolutely in our favor. So, if it comes to real decrease of the market, we will have a certain form of delay of this effect in our possibility. As we had it with the inflation, this is the same what comes. So, it's always something like a tailing and however flexible you are you have this in the bad side but you have it also on the good side so on the good side is if the market goes down the question is is it going down constantly or is it just a slight dip for a slight dip you will not see any inside dollar if it's a dramatic decrease like for example in China we have in China seen and that is something which at least I can refer to and hopefully this gives you a response to your question. In China, we had a collapse of the market from 1.5 to 1.6 million trucks in 2021 to a market which came down to 650 to 700,000. Still, still in this market, even if it was collapsing by nearly 55%, CDS was profitable in China. So that means, yes, we are homeless, but we are not hammered as anyone else. Because first, we have a contractual base which is lasting, and second, you need us. And that is the very, very good selling proposition which we have. That's the good thing that's solved. You cannot just substitute us. And in real, it's even worse, or in case of the customer, even better for us, because the exchange system is not possible. So this is the strong message then also for this year and for last year. Even while having increased the prices in some cases by more than 27%, steering Japan, with customers tax-excepted. Now you can say, but then when it is so easy, you could have done it. We have to be careful because if you are too strong on this point and too general on this point, it could happen that some customers, especially in Wales, They just can sit and say, listen, if this is the consequence of our dependency, we make sure that the dependency will not last any longer. So it's a walking on the line. In trucks, it's very clear. We have a competition there, but also the competition is very, very interested to bring up the pricing system and keep the pricing level. So especially in Europe and America, we see no deterioration of pricing at all, not even when it is going down. What we can say is in China, there is a tendency that more and more local suppliers are trying to get into the market. So, that's the answer to the question number one. Question number two was... Can we just restate that?

Yeah, if you need more price increases this year in trucks to cover inflation, or is this mostly carryover from what you have already negotiated and agreed?

It's carryover. It's carried over, and this is, we call it the wave two. And, you know, we announce it even with our customers, our big customers. It's Volvo, it's Trayton, it's Dyna. So, but it is not generically done. Everybody gets the same. This is on the customer specific, but there was a first wave one, and now we are ongoing wave two. And this way, too, of course, gives us better results. Because you could say, and I'm pretty sure you did already the math, and said, oh, very good, organic growth. But the organic growth was not that super profitable. And that is still the effect of the inflation, and still the effect. But this kind of diluting effect, we will see less and less by quarter to quarter to quarter. And I can tell you, Now, Mr. Schwitz, I know I look very angry at me, but I can tell you that in 2024, you see LDS nearly adjusted from this dip. And then you see the real possibility level of this dip. Because, you know, all the time you have to discuss with you, you have to explain, you have to excuse, you have to show how the inflation is absorbed. In the end of the day, 2023 is a transition year for LDS. It's a recovery info already for Athenian, and it's a tradition for RBS. 24, assuming that you see no other horrible events in Asia, for example, then we can say the contract style has all the inflationary numbers included. The cross-cutting effects are also included. So this is very promising then for RBS in 2024. We see 24 internally as a clear recovery year for RVS. And we're working on that to even uplift this kind of effect with some portfolio adjustments. In CVS, I would say we are at least three to four quarters ahead. Here we could be faster. Here we see the effect faster coming into the game. And here we see eventually also quicker than expected the portfolio adjustments coming into play.

Perfect. Thank you.

The next question comes from . Please go ahead with your question.

Yeah. Thank you for taking my questions. First one, just a quick clarification also related to the July. Evan, you said that 1.4 billion of revenues are under review. I guess during the full year results, you said that 10% of the portfolio is under review. And if I'm not totally wrong with my calculator, 1.4, it's more than kind of 20% of the portfolio. Did I get that right, that the amount of revenues here currently considering have just doubled within like two months or so? Yes, would be the first question.

Thank you for the question. We took, for your calculator, you take, please, the assumed revenue of the year 2023, which is assumed to be in the range of, let's say, 7.5 billion. From the 7.5 billion, we take really closely close to die, is currently 1.38 billion. So this, if you're right, it's no longer 10%, it's closer to the 16%. Number one, right. Well calculated. Number two, it's a dynamic process. So what we see is red, yellow, and green. This is how we cluster the whole product and company's portfolios, not everything. everything what is not a contributor, it's a diluter in terms of EBIT, is in the red. Everything what is not to our extent of EBIT margin is in the yellow, and everything what is either on the line or above the line is green. So, you can imagine that the 700 which I spoke at the very beginning when we met, this is the red and stark orange, very dark orange to red. And what is now Additional to that is in the yellow. So this is where we say, can we fix it or do we have to correct it? Or that's, by the way, the third option. Do we have to do a strategic partnership with someone who can massively help us to get this business back or eventually on the level which we wanted it? So this is in terms of the accuracy of the numbers. Hopefully this is now understood.

Yeah, perfect. Thank you very much. Second question would be on CVS, and I guess we heard from some European OEMs in trucking space that they saw an uptick in product compilation in trucks, not a big one, but let's say an uptick from low compilation. Can you confirm this, that you've also seen this, and this is also true for non-European trucking OEMs? That would be the second question.

If it's fine for you, I would like to take it because trucks, as you know, is my territory. And even from Greece it's that, huh? I do. What you have seen last year was an exceptionally run, especially in Europe and America, on trucking production slots. This is very common in America because there we have a cyclicality of the market which is exceptionally high, 30%, 50% up, and then next quarter 20% down. So the cyclicality leads to a certain form of purchase behavior. The purchase behavior in America is very, very similar always over the last 30 years. We know it also from Freightliner. When something is a rush, everybody wants to get a production slot. And they just cover it to take it. Whether this has been a binding or a really binding pressure, and you know it, especially in America, it's not the case. So the cancellation here, the up and go, this is normal business. This is why you remember when the numbers were so significantly up in the quarter four and quarter one last year and this year, we were always a little bit decent and modest. We said, yeah, the markets are good, but we don't want to be now, yeah, we don't want to celebrate it before it comes to real execution. In terms of Europe, we see one thing and we said it also. We see that the The trailer market, which is not really correlating to the truck market, not really correlating, so you can't say, if this goes down, the other thing goes down also, only with a delay of three or four months. But the trailer market is relatively modest. By the way, in China, it's the opposite. The trailer market in China is extremely modest. In Europe, it's very modest and slightly, slightly going down. So this gives us, and this was always for us, the reason why we said whatever kind of orders we see with the trucks we're in, we're a little bit careful. What we can see so far is, you know, some of our customers, they even locked the books in November last year. In fact, we opened the books only three, four months after because we cannot come up with the production. Now we see that some of the slots, which were taken by big, huge customer fleets, are just postponed, shifted, whatever you call it, in Europe. Not in China at all. Not at all in China. There the run is leading. In America it's getting stable, and in Europe it is still positive. So that means what? Our assumption is still relative. We see a slight increase. We see a positive market. We see a demand which is in our favor. But we don't see an exploding market, and we don't see an imploding market. When I speak about this index, I mean 20% up or 20% down.

Thank you very much.

And now we have a follow-up question from UBS. Please go ahead.

Yes, thanks for taking my quick follow-up question. The first one was really on the China metro market. because, you know, overall, I remember the past, you said you're likely to lose some share there because the share was very high in the past. Now, what we observe in the market, the metro market, is not so bad, but we see a shift from under to overground. And I was just wondering if that also relates to the market share situation, whether you have a stronger market share in the subways or if there's any difference in that.

That's the first one. Thank you. So, as everybody points to me, I will try to do my best.

In terms of the metro market, I think whether this is underground or on the ground, this is for us no different. And by the way, to be very honest, I currently in this minute have no information to split the metro market between below and above. I don't have it. Eventually, when you have it, and I can speak with Jürgen Wilder whether he sees a difference I assume, and I assume very strongly that there is no difference. What we see is, and that is also something expectation management here, to be very clear. Our forecast so far for this segment of the market is very positive. We see an increase of roughly 20%, 25% for last year, by knowing that last year was a horrible year. It was a very bad year for the overall market. Because in 2019, we had roughly 6,500. In 2020, we had nearly 8,000 hatreds. And they're coming now with a number of 5,300. That's our assumption for this year. What we see in the market is, as more as this market is standardizing, the more the Chinese standard is getting also in this segment, we have to fight. That means, currently, the more differentiation we see from municipality to municipality, this is in our favor. You know, this is our business concept, also yours. The more differences we have, the better for us. The more it gets standardized, like in the high-speed train, the more it gets to the burden of the margins. Now you can say, but you're no longer really significant in the high-speed train. Number one, the high-speed train numbers absolutely... They came down by 75% from the highs of 2015 to 2016. And we are now currently in the market assumption of 80 to 100 trades, right? So this is really a question of what it was. What for us is important is the after sales. What is important for us is that we are coming still with components into this business. And what we are seeing and what we are working on is to be perceived as a Chinese supplier. the more we are perceived as a non-China supplier, we will be taken out. This is the reason why we are very happy with our joint venture structures, which we have there. And this is why we are considering that China itself, we have this China for China. And this is a strategy which you not only hear from us, this is also what we have to do in the near future and also in the mid-force. Because if we are not doing it, we are facing significantly disadvantage in the play. And this is not only cross-business regulations, this is tariffs, this is barriers which we are even not perceiving, so this is why we need to Chinese more our business in China, to make it more independent. And I give you one example. We have a lot of internal contribution that means You have a lot of supplies from Europe to China with components. They're inter-company supplies. We are facing in Europe inflation, right? The Chinese inflation currently is in the range of 2%. So that means price adjustments in China because of imported products is not negotiable. So it's not easy to do that. So you could say it's even in our favor that the market for high-speed trains was so poor, because one thing is for sure, we couldn't, we could not just proceed what we did here in Europe and America, just forwarding the inflated prices. We could not, because they would say, listen, we don't have the inflation time. So in fact, you could say the weakness of the market was for us an upside, because when we come back to a stronger market, Then demand will rise, supply will be eventually shorter, and then we can make the price adjustments which we have to do anyway.

Yes, that's interesting insights, Mark. I appreciate that. The second follow-up was just real quick on the CVS order intake sequentially in Q1, the 130 million chunking increase. I was just wondering, was that entirely driven by the bounce in China's And also in China, you still found it a bit more muted on the year, which I would probably agree with, because when we look at the recent monthly development, March, April was not so strong then. So it seems to be indeed a very volatile recovery in the Chinese truck market. Is that also what you have observed in the last couple of weeks?

First of all, Ben, in regards to the first element of your question, I mean, the one reason why also kind of the order intakes were higher than what you basically had as the consensus. It's driven to a large extent by what Mark said before, the closure of all the books of some of the OAMs last year, reopening them in November, and then everybody joining in order to secure certain slots within 23 for production. And we don't expect those order intake levels to stay within 23. We expect them to decline again. That goes, of course, needless to say, hand-in-hand with our revenue expectation, where we're also a bit more bearish, like we discussed before. So we see it as well, if we look at the month, a similar view on things like USRAN.

Good.

Thank you, Frank.

Thank you, USRAN.

And the next question is a follow-up from Carmen Tancred. Please go ahead with your question.

Hi, thank you very much for taking my follow-up. I just got one more question on your China JV or partnership strategy. So just as you plan to probably expand or further develop your JV or partnership in China to fight for that China for China strategy, could you give us a bit more dynamics on the cooperation with the China partner there? and whether that will affect your kind of technology advantage in your products over time. And also, in terms of the JD partner, I'd assume it's more local companies, not your key competitor in China like QYSJ.

Is that correct? Thank you.

Let me maybe first start what you're potentially hinting at also with that question. I mean, we have been quite often discussing with you colleagues in regards to the joint venture strategy within China and whether, so to say, a more kind of connected, linked business set up with our partners could somehow solve the issues of reduced market shares that we have been facing over time and can avoid that going into the future. We have to say that the joint ventures are, like we are currently set up, which are quite some, working well, working extremely well. a lastingly respected partner for the Chinese. I'll give you one example as a proof point. CRRT has won over the last year roughly 20 projects in Europe, where basically in 100% of those projects that they have won in Europe, we are in as Knorr-Bremse with brake systems and doors. So they are relying on us and you can also say that clearly potentially intrinsically motivated that they want to have us in rather they would have their subsidiary supplying the brakes. But you see here the name and the image, the perception that we have in the market as the market leader, as the technology leader accounts in the Western world, so to say. And the end customer in the end defines then the relevant supplier, at least for the safety parts, safety elements of the train, which is a good indication that the joint ventures are running quite well. Taking this, so to say, we can't, of course, strategically just go and, so to say, call out for a bigger joint venture with CRRP without discussing on IT rights. and how technology would be then steered globally. So this is of course a big, big issue for us because needless to say, Chinese partners would like to have a certain access to IP rights for the product, which is of course a big hurdle for us to jump over. It's not so easily solved. that issue, but our joint ventures, despite those potential bigger moves in China, are running quite well still.

Same is true for truck division. Thank you. Are we allowed to ask them questions? No. Credit Swiss and UBS, we should not ask. Okay. Then thank you very much for your time and for your questions.

If you have further questions, please reach out to the IR team and we wish you a great afternoon. Thank you very much. Thank you, colleagues. Thank you. Bye. Bye.